On Jan. 25, the Dow closed at over 20,000 for the first time — ever. While it may seem like the stock market is on the up and up and now is the best time to invest, some investors fear there may be some “pullback” from these record highs, according to CNBC. If you’re looking to start investing in the stock market, take some advice from North Central professors and alumni: play it smart and safe to reap the highest rewards and become the next wolf of Wall Street.
“If you were to ask the average student here on campus, ‘What do you know about the stock market?’ and ‘What do you know about EFTs?’ or ‘What kind of mutual fund would you look at?’ you get a blank stare from 90 percent of them,” said Patrick Gray, a finance professor at North Central.
But why do you get a blank stare?
“Ninety-three percent of millennials say that both distrust of markets and lack of investing knowledge make them less confident investing, according to a new Capital One ShareBuilder survey,” said CNNMoney.
A majority of millennials lack knowledge and therefore the interest in investing in the stock market. “As a millennial, I understand that many of my peers are skeptical of American securities markets because of the recent turmoil and corruption in banks,” said Jared Toops (‘16).“
This stems from a lack of a solid financial literacy program taught in high schools. Personally, I had limited exposure to finances — I learned to create a budget and balance my checkbook in a managing lifestyles class that involved a lot of cooking; this is quite similar to most finance “programs” in the U.S.
“So I’ve asked a couple of students… but they talk about how if they had a finance course in high school they learned how to balance their checkbook and come up with a budget which is nice, but to be honest, we don’t really balance checkbooks like we used to,” said Dr. Brandon Sheridan, an assistant professor of economics at North Central.
Knowledge is one of two of the biggest barriers to millennials investing, and it’s easy to see why. Financial literacy isn’t nearly important as it should be; instead we’re taught how to titrate in chemistry or about a short history of the world in social studies, but we aren’t taught that investing in the stock market is a smart financial move. “…most people don’t have somebody who will sit down and talk with them and explain why it’s so important to start early and to maximize your returns,” said Gray.
Another barrier — maybe the most important one for millennials — is a lack of funds. Speaking from personal experience, I work two jobs, both which pay minimum wage. Realistically, I am not able to invest due to my funds being allocated elsewhere at this point, and I think that most millennials and college students can agree that they don’t have the money to invest.
One of these expenses that may stop millennials from investing may be student debt. According to Pew Research Center, students in 2012-2013 borrowed approximately $110 billion for their education. This is up $86 billion from 1990-1991 due to an increase of 62 percent in college enrollment.
Dr. Sheridan said, “I think now more than ever you see young people in college both more often and for a longer period of time… that’s more people that are now in college and working either not at all or minimum wage jobs and… they also take on a lot of debt and so that debt can sometimes be overwhelming and they think ‘Maybe I should pay that off first.’”
While it may be tempting to put any extra money from your paycheck toward paying off debt, extra money should be allocated toward a retirement fund. “Every dollar in student loan debt reduces your overall retirement savings by 35 cents, according to a report from Morningstar. That means if you have $50,000 in student loan debt, you’re losing out on $17,500 in retirement,” said CNNMoney.
So $17,500 may not seem like a ton of money in the grand scheme of things, but it can really hurt you to pay off your debt instead of investing the extra income. “People who wait too long to invest may not be able to stop working,” said CNNMoney.
Retirement, realistically, may become a luxury for a majority of millennials not only in the U.S., but countries like Japan as well. Thirty-seven percent of millennials in Japan expect that they will work until they die, and they are quite accurate. With the lack of a retirement fund, it will be impossible to retire. If you do retire, you’ll be relying on social security, a governmental program with a questionable future. Despite this, “40 percent of millennials plan to fund at least a portion of their retirement with social security,” said CNNMoney.
But if you don’t have the funds or the knowledge, where do you even start? The stock market is admittedly a confusing place to an outsider. “As far as stocks go, a lot of it is smoke and mirrors. No one knows if it’s gonna go up, down, or sideways,” said Steve Pulaski (‘18). The world of stocks also contains a lot of jargon that isn’t easily understandable unless you’ve immersed yourself in the financial world.
But the rewards of learning more about the stock market and investing far outweigh the work it will take to figure out the confusing world of Wall Street.
Why, you ask? Let’s talk numbers for a minute: according to Gray, most people begin investing when they’re 35. Instead of sticking your money in savings, you could invest in a stock that compounds annually at 8 percent. So you invest $4,000 a year and by the time you’re 65, that money grows to $463,000. Great, right? There’s almost $500,000 for your retirement. You can now take out $37,000 a year once you retire and live pretty comfortably.
But it gets better.
If you began 10 years earlier, at the age of 25, investing the same amount ($4,000) into an 8 percent annually compounded stock, you’ll arrive at 65 with $1,000,001 in your retirement fund. You can become a millionaire simply by letting your money make money for you while you work a lot less longer than your peers. With that much money in your account, you can take out $87,000, which is more than some people make in a year. You can be a world traveler with that kind of money.
But it’s not necessary to wait until you’re 25 to begin investing. You can start small. Some investment apps will require only $5 to get started while companies may require a minimum of $500. Before giving someone $500 and having them turn it into $5,000, be sure to have at least six months of savings first, recommends CNN Money.
The stock market is not as scary as millennials believe it to be. Yes, millennials have seen more down in the stock market than up, but it’s a cyclical pattern and the long-term trend is upwards. Still have reservations or don’t know where to even start with all of this? Here’s a few tips on how you can get started investing:
- “Take FIN 370 as your LEV credit,” says Gray. A class that teaches you about personal finances and counts as a general education requirement? Awesome! But it will really teach valuable skills that will help your life in the long run.
- If you don’t want to take a class, seek out a financial advisor at Edward Jones, Calamos Investments, or PMA Financial. North Central alumnus Nick Parker is a financial advisor at Edward Jones, and Toops works with Raymond James & Associates, both in Naperville.
- Download apps like “Acorns”, which takes spare change from debit or credit card purchases and invests them in a varying amount of funds. “iBillionaire,” another popular app, shows you what billionaire investors buy on the stock market. It may or may not make you the next Warren Buffett.
- Start out small with something like penny stocks if you’re doing it on your own, said Toops.
- DO NOT try to bet on winners and losers in the stock market. That is an easy way to lose all your money, according to Dr. Sheridan.
